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India Policy Brief

OECD Better Policies Series NOVEMBER 2014 www.oecd.org/india

Innovation
ADDRESSING ECONOMIC AND SOCIAL CHALLENGES THROUGH INNOVATION

India identifies innovation as a priority and has committed to catalysing inclusive development.

Using innovation to upgrade in global value chains (GVCs) requires investment in a range of knowledge-
based assets, from R&D to intellectual property.

Policy action on education, and improving the conditions for entrepreneurship, is critical to spread the
benefits of innovation across Indian society.

What’s the issue?
India has identified innovation as a priority. Its national strategy
“Decade of Innovations 2010-20” commits to strengthening
science, technology and innovation (STI) capacities, with an
objective to increase gross expenditure on R&D to 2% of GDP
by 2020. The commitment to innovation is reflected in India’s
recently launched “Make in India” initiative, which aims to
strengthen manufacturing. At the same time, India’s 12th
Five-Year Plan (2012-17) seeks to catalyse growth for inclusive
development. A National Innovation Foundation supports
grassroots innovators, and an Inclusive Innovation Fund (IIF) is
expected to mobilise finance to support enterprises developing
innovative solutions for the “bottom 500 million”.
However, inputs to innovation remain a challenge, not least
low business expenditure on R&D (see Figure). Low school
attainment rates and the poor quality of the education system

India needs to improve its innovation inputs

Normalised index of performance relative to the median values in the OECD area (Index median = 100)

Top/Bottom 5 OECD values Middle range of OECD values OECD median India
a. Competences and capacity to innovate b. Interactions and skills for innovation

Universities and R&D and innovation Innovative ICT and Internet Networks, clusters Skills for
public research in firms entrepreneurship infrastructures and transfers innovation

200

Top 150
half
OECD
100

Bottom
half 50
OECD
0

Source: Adapted from OECD (2014 forthcoming), OECD Science, Technology and Industry Outlook 2014. .

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India Policy Brief: Innovation NOVEMBER 2014

hamper the development of human resources for STI. What should policymakers do?
Relative to GDP, India has fewer world-class universities than
other economies such as Brazil, China and South Africa. Boost business expenditure on R&D by improving the
Furthermore, India’s output of patents and trademarks framework conditions for innovation and reducing
is small, and while the presence of the R&D centres of financing gaps for innovative firms (e.g. through
multinational enterprises has accelerated India’s integration public-private provision of seed financing).
in global R&D and innovation systems, it lags Brazil, China Ensure that framework conditions support investment
and Russia in its hosting of top corporate R&D investors. in the full range of knowledge-based assets – from
Meanwhile, barriers to entrepreneurship persist. R&D to skills and organisational processes – in
support of upgrading in GVCs.
Why is this important for India? Strengthen the skills base for innovation, so as
As a global hub of offshore knowledge-intensive IT services to expand the circle of individuals and firms that
and industry, India is a leading example of the economic successfully engage in innovation. This requires not
possibilities innovation can bring. But India’s growth rate has only improvements in school attainment, but also
slowed in recent years and poverty continues to be a major boosting the absorptive capacities of people in the
challenge. Investing in innovation and upgrading to higher workplace, via skills and management development.
value-added activities can boost productivity, create better-
paid jobs and strengthen growth. As such, addressing the
barriers to enhanced innovation performance is essential.

India’s “Make in India” initiative implies upgrading

participation within GVCs, particularly leveraging existing Further reading
competitiveness in certain export-oriented activities.
To achieve this, more widespread investment in R&D,
OECD (2013), Supporting Investment in Knowledge Capital, Growth
technologies such as ICT, data, designs, skills, branding and and Innovation, OECD Publishing. http://www.oecd-ilibrary.org/
new organisational processes is required. Improving the industry-and-services/supporting-investment-in-knowledge-
framework conditions for private investment in innovation is capital-growth-and-innovation_9789264193307-en
a low-cost step for policy-makers to take – focusing on well-
OECD (2014), Science, Technology and Industry Outlook, OECD
functioning product and labour markets, and systems of debt Publishing. http://www.oecd.org/sti/oecd-science-technology-
and early-stage finance, is essential. Ensuring the national and-industry-outlook-19991428.htm
intellectual property rights system is fit for purpose is also
Innovation Policy Platform.
essential for encouraging knowledge-intensive economic
https://www.innovationpolicyplatform.org
activity. Policy must enable firms to experiment with
potential growth opportunities and reap the rewards.

Ensuring the knowledge and benefits generated by innovative

activities reach wider society is crucial to reduce gaps in
living standards in India. Not all businesses and regions have
equal innovation capacities, and good linkages between
the private and public parts of the innovation system
are needed to disseminate knowledge. At the same time,
enabling innovative activities across the breadth of society
is also important. India already excels at “frugal innovation”,
creating affordable high-quality products using existing
technologies, and this has the potential to substantially
improve living conditions for the poor. Facilitating grassroots
entrepreneurship can both enhance access to products
and services for a wider share of the population and help
integrate previously marginalised groups into networks of
economic activities. Education and financial instruments
suitable for entrepreneurs are central here.

This paper is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and the www.oecd.org/policy-briefs
arguments employed herein do not necessarily reflect the official views of OECD member countries.